Philippe Aghion - Presentation OECD Chief Economist Talks 11 May 2020

Covid as a Wake-Up Call OECD, 11 May 2020 Philippe Aghion

Introduction • Among the many questions raised by the Covid crisis: • Why did some countries perform better than other countries • How can we minimize the scope and duration of the recession?

• How should we think the « after »?

Introduction • Distinguished colleagues have already greatly improved our understanding, in particular: • On what the crisis will cost in GDP terms (Gollier et al) • On how to deal with the increase in public debt (Tirole) • On how to organize efficient lockdown exit (Dewatripont, Gollier)

Introduction • This lecture: Covid is Wake-Up Call for changes in our economic and political systems: • Value chains • Social and health insurance • Civil society and trust

Introduction • A tale of two neighboring countries: • France: 67 million inhab., 27000 deaths • Germany: 83 million inhab., less than 7000 deaths

Value chains

Value chains • It is now widely acknowledged that: • Countries with low ratios of death over population, performed massive testing • Successful lockdown exit will require massive testing • Dewatripont et al.

Value chains • So far, France has been unable to test on a large scale, whereas from the beginning Germany has been testing more than 500000 individuals per week • France started in late March with only 5000 beds with respirators, versus 25000 beds with respirators in Germany

Value chains • Aghion; Bellora; Cohen; Gigout-Magiorani;Jean • Data from European Commission • « Anti-Covid » products: • Pharmaceutical components (reactives, medicines, active ingredients) • Medical instruments (respirators,…)

• Protection equipments (masks, gloves)

Value chains • Aghion; Amaral-Garcia; Dewatripont; Goldman • Data on imports and exports of « anti-Covid » products from 28 EU countries in 2019 • Data source is Eurostat, International Trade in Goods • Deaths: last update on 10 May, 2020

Value chains • From trade flows to production chains • Domestic production and outsourcing in the pharmaceutical sector • Again France versus Germany

Value chains • Two radically different evolutions: • France domestic production stagnated while that of Germany increased over time • German asset holdings abroad stagnated while French asset holdings increased over time

Outsourcing • Domestic Production

Outsourcing • Number of foreign affiliates of French versus German firms

Outsourcing • Direct investment assets abroad (FDI, intra-MNF debt,..) by French versus German firms

Outsourcing • Affiliates’ sales

Value chains • Kilic and Marin (2020)

Social and health insurance

Social and health insurance • Aghion; Maghin; Sapir

Unemployment, healthcare and poverty • Different types of capitalisms Unemployment

Healthcare coverage

Risk of poverty

The US model

Low

Not full

High

The German model

Low

Full

Low

The European model

High

Full

Low

Healthcare coverage and unemployment • Data sources OECD Health Statistics and unemployment rate indicator US Census Bureau historical series on healthcare coverage IMF World Economic Outlook 2020

Healthcare coverage and unemployment • Main assumptions ďƒ˜Estimations are based on the past relationship between percentage of uninsured with rate of unemployment and the IMF 2020-2021 forecast ďƒ˜For the US, we adopt a lower bound strategy ofor states that have not expanded coverage under Obamacare, we assume that percentage of uninsured reacts to unemployment as it used to over the period 2008-2018 ofor states that expanded coverage, we assume that the percentage of uninsured remains the same as in 2018 to reflect the benefits of the 2014 expansion policy

Healthcare coverage in the US and Germany

Healthcare coverage in the US and other European countries

Risk of poverty and unemployment • Data sources Eurostat at risk of poverty indicator US Census Bureau historical series on poverty and income OECD unemployment rate indicator IMF World Economic Outlook 2020

Risk of poverty and unemployment • Definition of at risk of poverty Germany: rate of poverty risk defined as share of population with disposable income below 60% of the national median income asstated by Eurostat US: rate of povert yrisk defined as share of individuals with income below 1.75 times the poverty threshold

Risk of poverty and unemployment • Main assumption ďƒ˜Estimations are based on the past relationship between the percentage of people at risk of falling into poverty and the rate of unemployment and the IMF 2020-2021 forecast

Poverty in the US and Germany

Poverty in the US and other European countries

Hence • The Covid19 pandemic enhances the importance of safety nets against unpredictable downturns • Need for the US to move towards more “cuddly” or less “cutthroat” capitalism

Civil society and trust

Civil society and trust • Bowles and Carlin (2020) • Aghion – Antonin – Bunel (2020) • Acemoglu – Robinson (2019)

Civil society and trust • Bowles and Carlin (2020) acknowIedge the irreplacable role of the State to deal with both, the health crisis and the economic crisis • But they also point to the key role of civil society an social norms • Examples of Germany, Portugal, South Korea

Civil society and trust • Good performance of Germany or South Korea owes a lot to civil society: self discipline, civic spirit, social norms • These played an important role in rapidly enforcing large-scale social distance devices • This in turn allowed these countries to rapidly stop the diffusion of the virus • Relying entirely on coercion and the State would not have done the job

Civil society and trust • Similar civic spirit is lacking in countries like France • Numerous French citizens from metropolitan areas bypassed the lockdown instructions during Easter vacations • On the other hand, the French government relied more strongly on coercion

Civil society and trust • Too much coercion may prevent trust-building • Aghion-Algan-Cahuc-Shleifer (2009) • « Regulation and Distrust »

Concluding remarks

Conclusion (1) • The Covid crisis is a Wake-Up Call

Conclusion (2) • Value chains • Countries with lower exports of « Anti-Covid » products exeprienced higher casualties, and may experience harder lockdown exit

Conclusion (2) • Value chains • Should developed countries regain control of some value chains, or just improve storage?

• Which sectors to focus on?

• Which policy instruments • Horizontal and/or vertical?

• Investment, not protectionism!!

• Importance of new entrants • Role of robotization

Conclusion (3) • Social and health insurance: • Can capitalism in the US become more « cuddly » while remaining as innovative as it is today?

Conclusion (4) • Reform capitalism: • How can France grant bigger role to civil society?

• Social dialogue • Decentralization • Move towards proportional system?

Keep safe!